Relative IncomeStrong Foreign Economies = More Exports = (AD R)Weak Foreign Economies = Less Exports = (AD L)AD reflects an inverse relationship between PL and GDPRChange in PL creates real-balance, interest-rate, and foreign purchase effects that explain AD’s downward slopeChange in C, IG, G, and/or XN cause change in GDPR because they Δ AD.Increase in AD = AD shift RDecrease in AD = AD shift LSummaryThe level of Real GDP (GDPR) that firms will produce at each Price Level (PL)Long-Run v. Short-RunPeriod of time where input prices are completely flexible and adjust to changes in the price-levelIn the long-run, the level of Real GDP supplied is independent of the price-levelPeriod of time where input prices are sticky and do not adjust to changes in the price-levelIn the short-run, the level of Real GDP supplied is directly related to the price levelLong-Run Aggregate Supply (LRAS)The Long-Run Aggregate Supply or LRAS marks the level of full employment in the economy (analogous to PPC)Short-Run Aggregate Supply (SRAS)An increase in SRAS is seen as a shift to the right.

A decrease in SRAS is seen as a shift to the left.

The key to understanding shifts in SRAS is per unit cost of production

Per-unit production cost = total input cost/total outputDeterminants of SRAS(all of the following affect unit production cost)Input PricesProductivityLegal-Institutional EnvironmentThe Great Depressionunemploymentfailed banksfearhungerWhy have a macroeconomic model?to explain the business cycleconfusionmenu costssticky pricefixed wagesWhy is SRAS upsloping?What would allow us to produce more output at any given price level? The answer is: a change in our resource base, or a change in technology.LRASSRASRGDPPLFull employment= all resources are employed.